Boston (Dec. 11, 2003) -- Financial services market research firm Dalbar Inc. has come out swinging against the proposal to enforce the 4:00 p.m. cutoff for mutual fund trade orders.
In a position paper, “The Four O’clock Shuffle,” the company railed against a rule proposed last week by the Securities and Exchange Commission aimed at ending late trading. The rule would require that orders to purchase or redeem fund shares be received by the fund, its primary transfer agent or a registered securities clearing agency by the time that the fund establishes for calculating its net asset value in order to receive that day's price -- 4:00 p.m. for most funds. Advocates of enforcing the cutoff say it will remove the opportunity for insiders to insert transactions after the close of business that take advantage of market-moving news that occurs after 4:00.
According to Dalbar, enforcing the cutoff “simply transfers the problem to another time of day,” because sellers will have to establish an earlier cutoff to do the processing required to meet the deadline. “Processing takes up to four hours to complete, which would translate to a 12:00 noon cutoff for sellers,” Dalbar said, so average retail investors couldn’t buy or sell after noon, but insiders would have four hours to react to afternoon news.
Dalbar said the proposal would require a widespread, costly revamping of systems at fund companies, firms that sell mutual funds, record-keeping firms, and employers that make employee payroll deductions for retirement plans in funds, and that the move would have several unintended consequences, including a resulting increase in manual orders by sellers who would phone in orders to fund companies, which would, in turn, lead to higher costs. And, Dalbar said, the eventual implementation of 24-hour trading will render the 4:00 p.m. cutoff obsolete.
Dalbar blamed abuses on opportunities created by mutual funds’ once-a-day pricing. Instead, it proposed continuous pricing as an alternative, which it said “could be done at a fraction of the cost” of enforcing a cutoff, and would only impact fund companies, which would have to revamp the portfolio accounting systems that compute prices. “Continuous pricing will prepare the fund industry for the eventuality of 24-hour-a-day trading,” Dalbar added.
-- WebCPA staff
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